Go for the restructuring option only if you have a thorough repayment plan and are confident you won’t have a big financing requirement soon
The Covid-19 pandemic has forced many borrowers to opt for the six-month moratorium to avoid any loan repayment default. Later, Reserve Bank of India allowed lenders to offer loan restructuring options to their borrowers to help them repay their loans easily. Eligible borrowers are allowed to extend the repayment tenure so that they find it easier to repay their loans with a reduction in the EMI size or to get the moratorium extended by up to two years subject to the lender’s terms and conditions. Here are the things you need to keep in mind to make an informed decision about accepting or rejecting the loan restructuring option.
Impact on credit score
At the time the moratorium on loan repayment was announced, it was mentioned that the borrowers who opt for it would not face any downgrade in their credit scores. However, in the case of loan restructuring, no such announcement has been made. Opting for a loan restructuring may directly or indirectly impact your credit score. Loan restructuring may get reported as “restructured” in your credit history that may not lead to a direct lowering of your credit score but lenders might take a stricter stance while assessing your repayment capacity if you apply for another loan in the near future.
That said, if you are not planning to apply for another loan, you can consider opting for loan restructuring. Even if there is a little dip in your credit score due to restructuring, you’ll get sufficient time to reinstate it gradually with timely repayments over a period of time.
Cost of borrowing
How much is the interest rate levied on the loan for which you may be considering the restructuring option? What is the tenure of your existing loan? How much is the cost of borrowing another loan to repay your current loan? Answers to these questions can also help you determine whether you should agree to loan restructuring or avoid it.
If the interest on your existing loan is higher than another loan product that you can get from the banks, you may opt for a new loan instead of going for a loan restructuring. For example, let’s suppose your existing loan is a personal loan product in which the bank’s interest rate is 18% p.a. and the remaining tenure is two years. You may also apply for a secured loan at a lower rate and for a longer tenure to repay the existing personal loan and save on interest as well as pay lower EMIs to clear your loan.
If you don’t have the option to raise another loan and your loan product is already a low-interest product like a home loan or a loan against property, you may opt for loan restructuring for immediate relief after a thorough assessment.
Future borrowing capacity
Opting for the loan restructuring will stretch your loan tenure. It means your loan borrowing capacity will get squeezed to the extent of the extended tenure until you clear the restructured loan. If you have planned for a loan in the near future, you may not be able to borrow the desired amount unless there is an increase in your income or the loan obligation comes down. As such, go for the restructuring option only when you have a thorough repayment plan and are confident you won’t have a big financing requirement during the extended loan tenure.
Other liquidable investments
Check whether you have any low-return generating and non-essential investments or assets gathering dust that you can liquidate to repay your loan before opting for the restructuring route. It could be a good option, especially if your loan interest rate is higher than the return you expect from your existing investments. This would help you in becoming debt-free faster so that you can invest again and accumulate the liquidated corpus. That said, due diligence, especially about penalties for a premature liquidation, is a must before finalising the decision to liquidate any investment to repay the loan without restructuring support.
If you don’t opt for loan restructuring and fail to repay the outstanding loan amount, it may result in a default and the same would be reported to the credit bureaus. Later, the lender may initiate steps to recover the loan amount. The last date to avail the loan restructuring option is December 31, 2020. The loan restructuring option can be availed only if you failed to repay your EMIs due to a loss of job or income necessitated by the Covid-19 pandemic. Loan restructuring may be subject to additional charges, and though it may lower your EMIs, you will have to pay more interest due to the increased tenure.
The writer is CEO, BankBazaar.com